The Global Minimum Tax and its impact on multinationals

August 12, 2021

With the upcoming implementation of the international tax, it is estimated that the tax could generate a revenue collection of approximately US$150 million per year, being a hard blow to tax havens and their low taxation rules.

1. Political background

During the first week of June, the agreement reached by the G7 member powers (United States, Japan, Canada, Germany, France, Italy, and the United Kingdom) was announced. (United States, Japan, Canada, Germany, France, Italy, and the United Kingdom). This treaty consists of the implementation of a global tax on large multinationals and Internet giants.

For the corresponding implementation, the G20 and the Organization for Economic Co-operation and Development (OECD) enunciated the global minimum corporate taxation of 15 percent, which will be applicable in the 139 member countries of the “OECD/G20 Inclusive Framework” and their tax jurisdictions.

2. Current taxation mechanisms

Currently, Double Taxation Agreements (DTA) have been implemented to carry out an audit of the largest economic groups in the world, which use tools that can favor large multinationals, such as:

  • Transfer pricing placing profits in lower-taxed countries and expenses in higher-taxed countries.
  • Undercapitalization, whereby some companies finance others with loans from territories with low-interest taxation, so pay less.
  • Treaty shopping, which allows the creation of conduit companies to take the profit from the source country to the country of tax residence of the company, without paying or paying fewer taxes.
  • Rule shopping, which applies an advantageous rule of the agreement in fraud of law.

3. Problems

Despite the existence of the mechanisms described above, the most important multinationals are currently headquartered in the most powerful countries but earn a large part of their profits in other tax jurisdictions. For the most part, the income generated escapes the control of the tax administrations of the respective countries. These countries thus lose an important source of tax revenues that they consider to be rightfully theirs. This situation is distressing, especially for the least developed, developing, and emerging countries.

4. Implementation of the Global Tax

The agreement announces that a method involving the use of two rules will be applied;

  1. The income inclusion rule taxes in the country of the parent company the profits of the subsidiaries that have been taxed below the minimum rate. This is a positive rule of inclusion of profits in the tax base.
  2. The under-taxed payments rule, whereby deductions intended to be applied in a country may be disallowed if the benefits have not been taxed in the country of origin at the minimum rate. This is a negative rule, which prevents the application of deductions and other tax-favorable measures.
Source: La Voz 10/08/21